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CH 09 Hull OFOD9 TH Edition
CH 09 Hull OFOD9 TH Edition
CH 09 Hull OFOD9 TH Edition
so that R = 6.030%
The forward LIBOR rate for the second year
is
1.0630 2
1 7.0707%
1.05
Options, Futures, and Other Derivatives 9th Edition,
Copyright © John C. Hull 2014 10
If LIBOR is used for
discounting continued
Check:
When the forward rate is 7.0707 and LIBOR
discounting is used the two-year swap has a value
of
6 5 6 7.0707
2
0
1.05 1.6030
so that F is 7.0651%
Options, Futures, and Other Derivatives 9th Edition,
Copyright © John C. Hull 2014 12
Swap Valuation with OIS
Discounting
Forward LIBOR rates are calculated as for
this simple example
Typically, 1-month, 3-month, 6-month and 12-
month forward rates are calculated separately
from the corresponding swap quotes.
Interpolation is used to calculate the forward
rates to value a particular existing swap.
Counterparty q1 q2 q3 q4 ……………… qn
default probability
n
CVA qi vi
i 1
n
DVA qivi
i 1